That was the situation before 2020. But just as the Covid-19 pandemic tore the oil market apart, natural gas also broke down. Global demand for gas is expected to drop 4% this year, “the biggest recorded demand shock” in history, according to the International Energy Agency.
US LNG buyers are now canceling shipments quickly. US LNG exports have decreases more than half of the pre-pandemic levels.
“There would have been too much LNG in the world even without Covid-19,” said Ben Chu, manager of Wood Mackenzie’s Genscape service, in a declaration. “Covid-19 made the situation worse.”
Overseas buyers are willing to pay cancellation fees instead of receiving shipments from US exporters, a sign of the deteriorating market. For delivery in August, between 40 and 45 shipments were canceled, almost double the cancellation rate in June.
In general, cheaper gas can stimulate demand, especially in the electric power sector. But this outlet is not as big as it could have been in the past, not least because gas has been cheap for some time. Thus, the coal-gas option is limited. With no export route and no greater recourse to public services, the glut of gas has worsened.
“As a result, we are seeing gas production closings in the United States, which we had discussed as a risk, as now part of our baseline scenario for this summer,” Goldman Sachs warned in his report. The bank plans to approximately 2 Bcf / d of shutting off the gas supply for approximately two months to avoid storage congestion.
The shutdown process can be seen as “the last shoe to fall into a global gas rebalancing process,” added Goldman. The logic is as follows: the LNG market was oversupplied, Asian LNG prices fell, more LNG was sent to Europe, which lowered European gas prices, which then led to closure of the economic window for sending American gas abroad.
Related: China’s oil imports from Saudi Arabia reach record level
Worse still, for American shale gas drillers, saved LNG cargoes will exacerbate the glut in the United States. By the end of the summer, the volume of gas canceled could add more than 760 billion cubic feet of gas to storage, according to Goldman Sachs.
As a result, Goldman Sachs reduced its price forecast for the price of natural gas to $ 1.40 / MMBtu for October, from $ 1.75 / MMBtu previously. However, the investment bank reiterated the tightening of the market in 2021, largely due to the decline in supply this year. Goldman has stayed with its price forecast of $ 3.25 / MMBtu for next summer, and US LNG exports are also expected to rebound as the market gradually tightens.
In the future, the US LNG business case may not be permanently scarred. The United States tends to shoulder the worst of the burden of rebalancing because contract clauses are the most flexible. When the market turns bad, as it does, American LNG carries the brunt of cancellations. But this flexibility can be sold as an advantage to potential buyers, says Wood Mackenzie, by reducing their risk. This favors potential American LNG projects.
Yet others say the outlook is more negative, even in the medium term. The pandemic, weaker demand and the shock to capital budgets make any additional North American LNG project unlikely in the next five years, according to S&P Global Platts Analytics.
However, upstream, there is no evidence that the shale gas industry can turn the tide. The industry has managed to significantly increase supply over the past decade. “[y]and in financial terms, the gas production boom was an absolute financial meltdown, “says one report from the Institute for Energy Economics and Financial Analysis (IEEFA).
Many companies did not realize positive cash flow even when prices were higher. But the price of gas below $ 1.50 / MMBtu is a disaster.
By Nick Cunningham of Oilprice.com
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